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Luxembourg research and development (R&D) spending has increased over the past three decades, but is still lower than the EU average and would benefit from a national focused strategy, Idea foundation has claimed.

The think tank, associated with the Luxembourg chamber of commerce, presented its latest report on research, development and innovation on Thursday 7 December.

Vincent Hein, the author, noted first of all that while spending (public, but especially private) was lower than in other countries, Luxembourg did rather well in terms of output (innovation) and in terms of research output (publications, citations and patents).

The objective set in Europe 2020 is to reach between 2.3% and 2.6% of GDP by 2020, and a third should come from the public sector.

Luxembourg spent 1.31% of GDP on R&D in 2015, which has not increased significantly over the past 5 years.

In 2013, overall R&D spending was 50% financed by the state (state sector and university sector), 32% by foreign investors, and 17% by companies. However, 52% of that spending is used by private companies in Luxembourg, which is still 11% less than the EU average.

Private sector spending

Private R&D levels are relatively low in Luxembourg, and the part of foreign companies doing R&D is high compared to an EU average of 10% of total spending. Hein argued that companies investing little in R&D and these high levels of foreign spending are both related to the openness and the internationalisation of the economy. Many international companies who have a branch in Luxembourg do their research in other countries on the one hand, and on the other hand, many Luxembourg international companies, such as ArcelorMittal or Goodyear, do their research here. It was noted that if the grand duchy could attract more headquarters, it was more likely that they could decide to invest in R&D here.

Luxembourg has a predominantly tertiary economy, and the industry sector only makes up 6% of GDP. Most R&D is funded by the industry sector at 63% of total private spending. Hein noted that spending in R&D in financial services was very low: while financial services make up 22.2% of GDP, they only spend 4.1% on R&D in Luxembourg.

R&D spending in the private sector is also concentrated within a few companies: in 2008 fewer than a dozen companies were responsible for 75% of R&D spending. Two types of companies stand out here: industrial giants and their branches which also work on the international markets (Goodyear, Delphi, DuPont de Nemours, ArcelorMittal, Tarkett etc) and service providers in engineering, such as SMEs in IT, logistics, space).

However, Luxembourg companies with 10 or more employees have higher levels of innovation than the EU average. Between 2012 and 2014, 65% of Luxembourg companies (1,140 out of 1,750) have introduced new products, procedures, marketing or organisation mechanisms. This is the highest rate in the EU, after Germany. There is no marked difference between sectors, but with the size of the company; for companies with more than 250 employees stands at 83%.

State support for private R&D

State aid to encourage R&D comes in various forms: from direct financial aid to companies (grants, loans etc) to tax incentives, or the information campaigns and supporting companies through the creation of platforms, networks and clusters. Furthermore, Luxinnovation can give out aid of up to €200,000, and there are loans for new companies.

The report notes that intellectual property law is currently being revised, and suggested that there are no tax incentives covering the whole R&D spending, along the French model of “research tax credits”.

Between 2009 and 2014, €250 million of direct aid to R&D were allocated to 324 projects with a multiplier effect of 2.8, reaching €706 million.

Between 2012 and 2014, state aid to private R&D represented 15% of all domestic corporate spending.

Recommendations

The OECD had already noted in 2015 that state R&D spending should be more focused on certain priority sectors to create more synergies with the public research sector. The selection procedure should also be more stringent, as this spending can steer the diversification policy of the economy. The report notes that this has not been taken on board in the 2017 law on RDI. It argues that the law favours SMEs but does not target young companies specifically, even though they play a strategic role in innovation.

The more selective procedure at EU level and the relative “abundance” of state aid in Luxembourg have led to few applications from Luxembourg companies to EU grants. Since 2014, 42 private organisations got EU funding in the Horizon 2020 framework for 74 projects. Luxinnovation is charged with encouraging applications.

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